Geronimo! Avoid These Common Financial Statement Pitfalls

Even the most dedicated business owners can struggle with preparing and reviewing financial statements. These important documents hold key insights about a company’s performance. Mistakes and data errors can drain resources and negatively impact profitability. Here are a few of the most common hazards you may encounter in preparing a financial statement and tips on how to avoid them.

Pitfall #1: Misclassifying Expenses

Many businesses are still relying on personnel to manually input and classify expenses, which opens the “trap door” to data error and misclassification pitfalls. Incorrectly classifying expenses can have costly consequences.

EXAMPLES: Classifying a client gift as entertainment may cost the company a hefty tax deduction. Booking an entry to the wrong payroll account might result in higher employment taxes for both the employer and the employee. Expensing rather than capitalizing an asset purchase may significantly impact net income, asset, and cash flow reporting.

How to avoid this pitfall: Automated data entry minimizes the potential for human error, and implementing a cloud-based chart of accounts and automatically conducting a computerized review of accounts will help you catch any mistakes in the initial classification. Today’s cloud-based accounting platforms are a valuable asset for both steps. Advanced functionalities such as automated bank feeds can provide even more comprehensive and up-to-date financial information and efficiently capture data into the appropriate account.

Pitfall #2: Relying on Outdated Estimates

Estimates and assumptions can be useful management tools, but only if they are up-to-date. They can facilitate decision-making in many contexts, such as identifying uncollectible debt, determining optimal points for revenue recognition in long-term projects, and calculating appropriate asset depreciation. Most organizations utilize estimates when preparing their financials, but many fail to update them regularly.

EXAMPLES: It is standard practice to replace computers every three years. If a company relies on an outdated depreciation schedule, then it may estimate the life of the computer to be five years. That mistake would inaccurately reflect the computer’s true economic utility and could have significant income ramifications.

How to avoid this pitfall: Implement automatic updates to depreciation schedules. In addition, update estimates and underlying assumptions regularly rather than simply working from historical data that hasn’t been recently validated as accurate.

Current cloud-based accounting tools reduce the likelihood of outdated estimates common in antiquated software by allowing anytime,anywhere access to real-time financial data that you can adjust as appropriate.

Pitfall #3: Messing with Data from Prior Accounting Periods

Accidental — and also deliberate and fraudulent — book entries to what was supposed to be a “closed” period can occur and may lead to financial loss, as well as wasted time and headaches when the mistake is discovered. This is especially common when a company is using out-of-date accounting systems that don’t have the sophisticated security control system capabilities available in today’s cloud-based, modern accounting software.

How to avoid this pitfall: Choose cloud-based, sophisticated accounting software with high-level security features, including a “lock” option so you can control or even prohibit changes to a period after closing the books. Automate the lock feature so that it activates on a specific date and time, and set-up alert notifications when users access or attempt to access locked data.

Pitfall #4: Relying on Untrained Staff

Untrained staff can wreak havoc with the books, especially when the books are relying heavily on human entry and review. Problems like unlocked periods, misclassified expenses, obsolete estimates, and a multitude of other errors are far more likely in the absence of proper training.

How to avoid this pitfall: All staff with access to the company’s financials should have a thorough understanding of basic accounting principles and be adept at using the relevant accounting software. Compared to earlier solutions, the latest tools are quite user-friendly and intuitive, and most include vast resources to help users become familiar with the many helpful features they offer. Companies should encourage staff to take advantage of these built-in training modules and support databases. In addition, they should consider working with their accountants to provide quarterly and annual training sessions to help staff expand and refine their mastery.

Pitfall #5: Working with Insufficient Support

Sometimes a company’s accounting staff, systems, or processes simply aren’t providing sufficient support to maintain efficient operations, much less growth.

How to avoid this pitfall: Whatever the problem, a full-service CPA firm that understands what accounting systems work and are available can be a valuable resource. Accounting firms that provide client accounting services can assess a company’s in-house operations and procedures and find specific solutions to help the company save time and money.

Engage CRI to Protect You from Financial Statement Dangers

CRI’s client accounting services team can guide you away from financial statement pitfalls (that could cause real harm to your business) and toward the cloud! Having real-time access to detailed, error-free financial statements and benchmark reports can be your reality and allow you to make well-informed, thoughtful business decisions from anywhere, using any device. Contact us to find out how we can help you implement strategies to evade the hazards lurking on your road to success.